In this blog, we will cover and discuss the roles of Fannie Mae and Freddie Mac in the housing and mortgage industry. What Are Roles Of Fannie Mae And Freddie Mac? The main role of both of these mortgage giants is to provide liquidity in the mortgage markets. Fannie Mae and Freddie Mac purchase mortgages from lenders. Lenders use their warehouse line of credit to fund mortgages. Once they fund using their warehouse line of credit, lenders need to sell the mortgages they funded on the secondary mortgage bond markets. Fannie Mae and Freddie Mac are the two largest buyers of mortgages in the secondary mortgage markets.
How Does Fannie Mae and Freddie Mac Keep Liquidity in the Housing and Mortgage Markets?
By buying mortgages from lenders, lenders can pay down their warehouse line of credit and originate and fund more mortgage loans. This is how the housing markets remain affordable and stable. Due to liquidity, lenders can offer more home loans for homebuyers with low down payments and low mortgage rates. Conventional loans are called conforming loans. This is because Fannie Mae and Freddie Mac will only purchase conventional loans that conform to their agency guidelines.
Conventional Loan Guidelines Are Set By Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac Set Standards and Agency Mortgage Guidelines On Conventional Loans. The Federal Housing Finance Agency (FHFA) is the federal agency that regulates Fannie Mae and Freddie Mac. In this article, we will discuss and cover the Roles Of Fannie Mae And Freddie Mac In The Mortgage Industry.
Mortgage Giants Fannie Mae And Freddie Mac: Government Sponsored Enterprises
Fannie Mac and Freddie Mac are called Government Sponsored Enterprises also known as GSE’s. Fannie Mae and Freddie Mac are the two giant mortgage lending institutions for conforming mortgage loans. Most American homeowners and homebuyers have heard of Fannie Mae and Freddie Mac but do not have a grasp of what their functions and role is. There are still many folks who ask what are the roles of Fannie Mae and Freddie Mac. In this article, we will analyze the differences between the roles of Fannie Mae And Freddie Mac.
Differences Between And Roles Of Fannie Mae And Freddie Mac
The answer to What Are The Roles Of Fannie Mae And Freddie Mac is the following. When Borrowers need to qualify for Conventional Loans Fannie Mae and Freddie Mac guidelines need to be adhered to. Lenders who originate Conventional loans need to follow Fannie Mae and Freddie Mac guidelines. This is because in order for lenders to be able to sell mortgages they fund Fannie Mae and/or Freddie Mac.
Importance of Meeting Fannie Mae and/or Freddie Mac Mortgage Guidelines
Both Fannie Mae and Freddie Mac will not buy Conventional Loans that do not meet their guidelines. This is why Conventional Loans are called Conforming loans. Conventional Loans need to conform to Fannie Mae and/or Freddie Mac Agency Guidelines in order for Fannie/Freddie to purchase the mortgages they fund.
What Is Fannie Mae And Freddie Mac?
Fannie Mae and Freddie Mac are private companies that are backed by the federal government. Fannie Mac and Freddie Mac is not a mortgage lender. Fannie Mae and Freddie Mac do not fund loans directly to the public consumer. The general public has no contact with Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac’s role is to purchase the majority of home loans that are originated and funded by banks, credit unions, and institutional mortgage lenders. Fannie and Freddie purchase loans from lenders because their role is to provide liquidity in the mortgage markets.
Providing Liquidity To Mortgage Lenders By Buying Mortgages on the Secondary Market
Can relieve the mortgage lenders from their lines of credit so the mortgage lenders can fund more conforming loans. Both Fannie Mae and Freddie Mac have mortgage guidelines where lenders need to conform to them in order for the mortgage loan to be sold to Fannie Mae and Freddie Mac. After Fannie Mae and Freddie Mac purchase conforming loans from banks, credit unions, and institutional investors, they package them up as mortgage-backed securities (MBS) which are then sold to investors in the open market. Fannie Mae and Freddie Mac’s main objective and mission are to provide liquid access to banks, credit unions, mortgage bankers, and institutional lenders who originate and fund loans to the public.
What Is Secondary Market And How Does It Work?
When borrowers apply for a mortgage loan from ABC Mortgage Banker the mortgage banker will process and underwrite mortgage loans.
Here is the general mortgage process:
- ABC Mortgage Banker has what is called a warehouse line of credit
- They will use it to fund the mortgage loan
- We will use a case study here where ABC Mortgage Banker has a $1 million warehouse line of credit
- A warehouse line of credit is like a large credit card to be used solely for the purpose of funding mortgage loans
- ABC Mortgage Banker’s mission and goal is to use part of that $1 million warehouse line of credit temporarily to fund the mortgage loan
- Then re-sell the mortgage loan they funded back to either Fannie Mae or Freddie Mac
- In order for Fannie Mae or Freddie Mac to purchase loans from ABC Mortgage Banker originates and funds, all of the loans need to conform to Fannie Mae’s and/or Freddie Mac’s guidelines
- If ABC Mortgage Banker screws up and makes a mistake and a loan does not meet the guidelines of Fannie Mae or Freddie Mac, then Fannie Mae and/or Freddie Mac will refuse to purchase the mortgage
In this case scenario, if Fannie Mae and/or Freddie Mac refuse to buy the mortgage loan from ABC Mortgage Banker, then ABC Mortgage Banker will need to hold the loan which will tie up the $1 million warehouse line of credit.
How Do Resale Of Mortgages By Fannie Mae And Freddie Mac Work
The example below can explain the Roles Of Fannie Mae And Freddie Mac to our viewers. Once Fannie Mae and Freddie Mac purchase conforming loans from banks, credit unions, mortgage bankers, and institutional lenders Fannie and Freddie will package these loans into mortgage-backed securities to institutional investors. Institutional investors are pension funds and large money managers on Wall Street.
How The Mortgage Lenders Keep On Originating and Funding Loans
This chain of events of lenders being able to sell loans to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac relieve the lender of their warehouse lines of credit. This is how these two mortgage giants provide liquidity for the mortgage markets. This enables lenders to reuse their lines to originate and fund more loans. Packaging these loans as mortgage-backed securities and selling them to the secondary market to institutional investors where the investors make money from interest relieves the mortgage lenders to liquidity to generate more loans to public customers. They can start the whole cycle all over again and stimulate home purchases, refinance mortgages, and stimulate the economy.
Which Is Better? Fannie Or Freddie?
Both Fannie Mae and Freddie Mac have the same goals and objectives.
Their mission and the reason why these two Government Sponsored Enterprises ( GSEs ) were created was to do the following:
- provide capital
- market liquidity
- market stability
- market affordability to the residential mortgage markets
How Fannie Mae and Freddie Mac Were Created
The federal government launched Fannie Mae back in 1938. The Federal National Mortgage Association ( FANNIE MAE ) was created as part of the New Deal in 1938 under President Franklin Roosevelt. The goal for the creation of the Federal National Mortgage Association was for FANNIE MAE to purchase home mortgages from private mortgage lenders. It was also to stimulate homeownership and mortgage lending during the Great Depression. In 1970, the United States Congress created Freddie Mac. Federal Home Loan Mortgage Corporation was created to avoid Fannie Mae being a monopoly. It was also created to encourage competition and to expand the availability of residential mortgage loans.
How Does Fannie Mae And Freddie Mac Benefit The General Public?
Consumers do not have any direct contact with either Fannie Mae or Freddie Mac. However, Fannie Mae and Freddie Mac provide priceless benefits to homeowners and homebuyers. Fannie Mae and Freddie Mac make home mortgages possible by working with the thousands of banks, credit unions, mortgage bankers, and institutional mortgage lenders by providing liquidity and capital to them.
Importance of Lenders Reselling Mortgages on the Secondary Markets
If Fannie Mae and Freddie Mac did not buy mortgage loans from lenders and financial institutions, mortgage lenders will be limited on how many mortgage loans they can originate and fund due to lack of liquidity. Fannie Mae and Freddie Mac are the two mortgage giants that make homeownership possible for millions of American families. Due to these two government-sponsored enterprises (GSEs), almost any hard-working American can have the opportunity to qualify for a home mortgage with a low down payment and low mortgage rates at financial institutions without red tape.
